Under the Hood of the CPI: Transportation Inflation

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Last week, I showed how the eight major subgroups of CPI were contributing to the overall development of the inflation index. This week I want to drill down a little bit on one of the subindices: Transportation.

The Bureau of Labor Statistics ((BLS)), in case you didn't know, surveys products in more than 200 categories, and aggregates them into larger and larger agglomerations until we reach the 8 major subgroups and then ultimately the CPI itself. This means that we can drill deeper within each of these subgroups. The table below shows all of the next-level aggregates that make up Transportation. Transportation itself is 16.7% of CPI; the weights in the table are weights of the subindex in the overall CPI (so you will see that if you add all of them up except for the first line, you get 16.68%).

The table shows how the year-on-year change in the price level has evolved from 6 months ago to 3 months ago to last month to this month.


Weights

y/y change

prev y/y change

3m y/y chg

6m y/y chg

Transportation

16.7%

5.290%

3.750%

4.610%

4.853%

New and used motor vehicles

6.39%

0.648%

0.934%

4.347%

4.468%

Motor fuel

4.53%

13.926%

7.505%

5.360%

4.376%

Motor vehicle parts and equipment

0.40%

3.296%

3.378%

3.295%

1.799%

Motor vehicle maintenance & repair

1.17%

1.922%

1.776%

1.938%

2.041%

Motor vehicle insurance

2.49%

4.423%

5.259%

5.132%

5.056%

Motor vehicle fees

0.53%

1.387%

1.241%

3.409%

8.130%

Airline fare

0.78%

5.827%

4.675%

6.080%

14.127%

Other intercity transportation

0.16%

2.995%

5.103%

4.537%

4.377%

Intracity transportation

0.25%

3.060%

3.066%

3.237%

5.152%

What jumps out immediately to me is that the increase in transportation inflation over the last 6 months is clearly entirely due to the rise in motor fuel. The "New and used motor vehicles" portion has fallen from a 4.47% rate of inflation six months ago to 0.65% now; all of the other categories besides Motor Fuel have fallen from 6.73% to 3.66% (you can't see this in the table, but if you weight the changes by their weights and sum them, you will get that result).

In other words, if it weren't for the rise in gasoline prices, Transportation would barely be inflating. Transportation ex-Motor Fuel was running at +5.06% six months ago and is at +2.08% today. If the whole category was rising at 2.06% instead of 5.29%, the overall CPI would be 0.5% lower.

And wouldn't you know? Headline CPI is at 1.496%, while CPI-ex-energy (not ex-food-and-energy) is +0.912%. This little category explains almost all of the difference.

This is why economists, strategists, traders, and policymakers look at core inflation. It isn't because we don't believe that gasoline prices matter; it is because if we want to assess what is going to happen next in inflation, we would much rather look at stable categories like motor vehicle repair and motor vehicle fees than try to predict changes in prices at the pump.

So the interesting question here is, is the decline in the inflation of new cars and trucks likely to persist? Here is a chart from the BLS of the year-on-year change in "New Cars And Trucks" (seasonally adjusted, which is why the current number doesn't quite match up). The chart runs from 1/99 to the present.

click to enlarge


It looks to me as if the current near-zero rate of change in car and truck prices isn't so unusual. That big spike? It happened in 2009. Cash-for-clunkers was in mid-2009. It strikes me that perhaps the wholesale junking of workable vehicles had some secondary effects, one key one being that the supply of used cars vanished. Here are new cars and used cars separately:

Weights

y/y change

prev y/y change

3m y/y chg

6m y/y chg

Transportation

16.7%

5.290%

3.750%

4.610%

4.853%

New vehicles

3.57%

-0.209%

-0.439%

2.072%

1.314%

Used cars and trucks

2.01%

3.674%

6.020%

12.906%

16.148%

Wow! In May 2009, "Used cars and trucks" was deflating at -10% due to the economic recession. In July 2010, that subcategory peaked at +17.0%. That 27% made a difference of 0.54% in the overall CPI. So who deserves credit for averting deflation? Bernanke? I would say President Obama, and Congress!

Remember that Cash-for-Clunkers, however, was proposed as a "green" initiative. By getting a million old gas guzzlers off the road, we would reduce on gasoline consumption and clear the air some. Maybe this is true, but the economic cost wasn't trivial and runs far beyond the appropriated dollars spent on the program. This is what happens when good politics meets bad economics!

Back to the big picture economically, however - if we are looking for an obvious "goose" to inflation going forward, we aren't finding it in Transportation. There needn't be an obvious goose, of course. A rising tide (of money) should lift all boats. It is by watching the finer details of the CPI that we will be able to discern idiosyncratic inflation ("one off" price increases such as, for example, that caused by Cash-for-Clunkers) from the broad process that is more accurately branded inflation.

Next week, I'll look at another subindex and see if there are any signs of trouble lurking beneath.

Over the last 3 years, the S&P 500 companies whose performance relative to the market has the highest correlation with New Cars and Trucks inflation relative to core inflation are an unusual mix: [[PPL]], [[AMZN]], [[SRE]], [[FCX]], and [[NTAP]]. This seems entirely spurious to me, and results from the fact that Cash-for-Clunkers really messed up the natural data series. However, in the 3 years ending in 2008, one interesting name shows up: Autodesk ( ADSK ). That is interesting because Autodesk has nothing to do with autos as far as I can tell.

It is easier to find issues correlated with the overall Transportation category, because so much of its movement is related to energy. For the 3 years ended in 2008, these were the top 10 issues correlated to overall Transportation inflation (specifically, the increment of Transportation over core). Every single one is related to energy. Not a single car company on the list:

Jan 2005 - Jan 2008 monthly correlations

Correlations

Ticker

Company Name

Issue Beta

0.5132

[[MRO]]

Marathon Oil Corp

1.6931

0.5185

[[PXD]]

Pioneer Natural Resources Co

1.5519

0.5239

[[NFX]]

Newfield Exploration Co

1.2008

0.5265

[[APA]]

Apache Corp

1.7672

0.5352

[[NBL]]

Noble Energy Inc

1.2918

0.5595

[[TSO]]

Tesoro Corp

1.7513

0.5647

[[CHK]]

Chesapeake Energy Corp

1.2839

0.5952

[[MEE]]

Massey Energy Co

2.1922

0.6069

[[VLO]]

Valero Energy Corp

0.8039

0.6108

[[CNX]]

Consol Energy Inc

1.8243

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

See also Oil Exposure Through Currencies on seekingalpha.com



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Commodities

Referenced Stocks: ADSK , AMZN , FCX , PPL , SRE

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